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Twilio's 7 Million Share Offering Explained

Twilio Inc (NYSE: TWLO) shares are now down 34.7 percent in the past month after skyrocketing more than 300 percent from their IPO price in a matter of months. One of the biggest bearish drivers in recent weeks has been the company’s 7 million-share secondary offering completed last week.

For shareholders who may not understand why one of the hottest IPOs of 2016 has taken a nosedive, here’s a breakdown of what has happened.

What The Offering Means

This secondary offering allows insider investors in Twilio to cash out large portions of their stakes. These investors are already up hundreds of percent or more on their shares, and it’s not surprising that some of them would want to take the money and run. Twilio’s largest shareholder, Bessemer Venture Partners, sold 3.0 million of its 20.5 million Twilio shares during the most recent secondary offering.

Why The Share Price Is Down

Secondary offerings typically drive down the share price of stocks because the price of the offering is almost always significantly lower than the market price of the stock at the time the deal is announced.

The reason companies like Twilio offer such a discount to market price is to entice buyers to buy large blocks of stock. Twilio, for example, needed to unload 7 million shares. To find buyers for that amount of stock, the company had to price the offering at $40, well short of the stock’s $48 market price at the time of the announcement. If secondary buyers were willing to pay $48 per share for the stock, they would have simply done so on the open market.

Why The Stock Bounced Following The News

Twilio shares briefly bounced following the secondary offering announcement on September 18. This temporary bounce was likely due to short covering, as the stock was already down more than 16 percent over the prior month.

This short covering phenomenon was the short-seller’s version of “buy the news” mentality. Short-sellers were likely anticipating that concerns over a secondary offering would drive down the share price. Once the announcement was official, their trade was complete, and they closed their position by buying back shares.

Where Twilio Is Headed From Here

There are two ways to look at Twilio stock following the secondary offering. Twilio bears can argue that Twilio insiders, including Bessemer, seem very willing to dump shares at $40 and may be equally willing to dump even more in the future. After all, Bessemer still holds 17.5 million shares.

Twilio bulls, however, see the secondary offering dip as a buying opportunity and a second chance to get the stock at a discounted price. Now that secondary-related fears are gone in the near-term, the stock can be free to resume its uptrend.

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